MOORLACH UPDATE — VLFAA — April 6, 2012

Yesterday was action packed, as the State of California decided to file a petition for writ of mandate and a complaint for declaratory and injunctive relief regarding the Vehicle License Fee Adjustment Amount (VLFAA).  The County of Orange has one interpretation of Revenue and Taxation Code Section 97.70, and the State of California apparently has another.  Now it is up to the Superior Court of Orange County to decide which party has the correct understanding of the law.

The Voice of OC has the first piece on the topic, the LA Times provides the second, and the OC Register provides the third (it is their front-page, top-of-the-fold story, if you don’t count the Angels opening day promotional).  It reminds me of someone who is in your home and sees your wallet on the table.  They should leave it be.  Instead, they take it and try to walk out with it.  You then catch them and ask for it back.  After returning it, they sue you for not putting your wallet in a more secure place.  The State of California appears to be so dysfunctional, that it will reach into any available municipality’s wallet to survive.  While trying to survive is commendable, does the state’s survival have to be at the expense of the financial well-being of this wallet’s owner.  The County of Orange did a careful review of the applicable code sections and worked closely with the other parties that are impacted by this multi-car pileup that the state instigated.  We’re disappointed, but not surprised, at Sacramento’s actions.

The OC Register also has an editorial today on the proposed ARTIC station in Anaheim.  Also known as the Anaheim Regional Transportation Intermodal Center, ARTIC has plans on the drawing board for a majestic enclosed structure.  It begs the question:  Why?  Other trains stations in the county operate fine without being ostentatious.  In a time of need, when certain governments are trying to grab anyone’s wallet, it seems to be an unnecessary extravagance.

Otherwise, it’s been a quiet week, so there are more LOOK BACKS than normal.

Please accept my best wishes for a glorious Easter weekend.

 

 

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State files suit against Orange County over property taxes

 

 

By Norberto Santana Jr.                              

California’s Department of Finance, along with the chancelor of the state’s community colleges, has filed suit against Orange County arguing that its tax grab of $73 million late last year was illegal.

The implications for the county government are stark should the state be successful because it would blow a hole into the county’s general fund budget, which would mostly affect the District Attorney and the Sheriff.

Both have said they cannot sustain further cuts and maintain their constitutionally-mandated duties.

After legislation in 2011 changed how the state distributes vehicle license fees, Orange County was left in an odd situation because it still depended on nearly $50 million from that revenue stream unlike other counties.

Back when the county financed its billion-dollar bankruptcy in 1995, state officials allowed them to send a portion of their vehicle license fees directly to bond holders. But in 2007 when the county refinanced that debt, the intercept – and its legislative authorization – was detached.

Despite warnings that the legislative authorization needed to be quickly reestablished, county legislative leaders went silent. The vlf intercept, as its known, was never addressed in any subsequent county legislative platform. And the county’s lobbyist, Platinum Advisors, also didn’t address the issue.

Last year, Gov. Jerry Brown’s budget staff found the gaff and took back the money spurring an intense reaction from county leaders. State Assemblyman Jose Solorio sponsored last minute legislation but it failed to make it through both houses of the legislature.

In the wake of unsuccessful legislative efforts, county leaders reacted to Brown’s move by simply taking the money themselves. After hiring several law firms, they convinced Auditor-Controller David Sundstrom to ignore Sacramento’s budget allocations on property taxes.

Instead, on Jan. 31 before Sundstrom left for Sonoma County, he allocated a whopping $73 million away from local schools and to the county.

“This action, which the Orange County Auditor-Controller has undertaken, violates both statute and the California Constitution and must be enjoined,” read the state’s lawsuit.

“This is a nice welcome letter to Jan Grimes,” said Orange County Supervisors’ Chairman John Moorlach, adding that the issue will be addressed in closed session on Apr. 17.

Grimes is now the interim auditor because supervisors postponed an appointment for Deputy Auditor-Controller Shaun Skelly earlier this month and he resigned in protest.

Despite the lack of a permanent Auditor, Moorlach said he is confident that Grimes is up to the job.

“Jan is a strong seasoned leader,” Moorlach said. “She understands the issues and understands the department. I’m not worried. She’s been with the county for 32 years. And I don’t think she’ll be intimated by the Department of Finance.”

Other county officials said the lawsuit, filed today in Orange County Superior Court, was not a surprise.

“This is not unexpected,” said Nick Berardino, general manager for the Orange County Employees Association. OCEA and their lobbyists were a key part of the OC offensive on the issue last year trying to convince Brown and the legislature to go a different route.

Berardino, who is known to have a close relationship with Gov. Brown, said “I hold out strong hope that we will all be able to still get together and work out an agreement that will serve the county and the state’s interests.”

County CEO Tom Mauk agreed with Berardino’s take but said discussions may be complicated by the lawsuit.

“My hope was the state would have been interested in a discussion and agreement before they filed litigation,” Mauk said. “But now that they’ve filed litigation, we go to court. If there’s an interest in talking further, we’re certainly interested in exploring that. But they’ve now taken a legal step and we’ll have to respond.”

 

 

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California accuses O.C. of illegally shifting $73.5 million

Suit alleges that officials took money from schools and community colleges for daily expenses and balancing the budget. Supervisors say that returning the money could bring layoffs or pay cuts.

Orange County officials illegally diverted $73.5 million from local schools and colleges and used the money to balance their budget and cover day-to-day expenses, state officials alleged in a lawsuit filed Thursday.

The lawsuit, filed in Orange County Superior Court, contends that it was unconstitutional for the county to grab the funds, which should be spent on cash-strapped local schools and state community colleges.

The money fight erupted last year, when Orange County lost $48 million in vehicle license fees and redirected tax funds to the county that were supposed to go to schools. Without the tax dollars, the county might have been forced to lay off hundreds of workers, close jails and cut care for indigent patients, county supervisors said at the time.

But according to the state’s lawsuit, county officials knew they were breaking the law when they took "the extraordinary step of flouting the law and illegally redirecting property tax revenue" to help pay their own bills.

Supervisor Bill Campbell said the move was justified.

"We believe we’ve honored the law," he said. "And our whole desire is to make sure that Orange County taxpayers are treated as equally as other taxpayers across the state."

Community colleges, which were hit with about $400 million in cuts last year, are not protected under the move. Officials have estimated that the colleges, which have already had to cut classes and raise students’ fees, could be affected by an additional $10 million to $15 million.

"It’s at a time when the well is running dry," said Dan Troy, the budget director with the chancellor’s office. "Your options on the table are few."

The state was joined by the chancellor’s office in the lawsuit, which states that the county should not be "rewarded for its refusal to follow the law."

So far, K-12 schools in Orange County have not been affected because of a deal between the county and education officials to provide more than $25 million in funding for one year. Still, Orange County Supt. of Schools Bill Habermehl worries what could happen if the lawsuit drags on.

"Hopefully, we can get this lawsuit settled quickly," he said.

Originally, the county said the funds were needed for day-to-day expenses and to avoid layoffs. But because of underspending by departments and higher sales tax revenue, the money instead has been used to help pay down the debt from the county’s historic bankruptcy in 1994, as well as on computer software and jail upgrades, Campbell said.

If the county were to return the $73.5 million, layoffs or cuts in pay for county workers could occur, Campbell said.

County Board of Supervisors Chairman John M.W. Moorlach said the matter will be discussed in closed session April 17.

"We didn’t go down this road lightly," he said.

 

 

 

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State sues O.C. over $73.5 million money grab

Andrew Galvin

Remember that $73.5 million that Orange County grabbed from schools a few months back, forcing the state to make up for it? This was after the state grabbed $49.5 million in Vehicle License Fee money from the county to help balance the state’s budget.

 

Well, the state wants its $73.5 million back.

California’s Department of Finance on Thursday sued the county in Orange County Superior Court, asking the court to order the county to recalculate what it pays the state to help finance schools based on the department’s interpretation of state law.

In a 10-page complaint, the state argues that the county willfully miscalculated the amount it ought to be paying into the state’s Education Revenue Augmentation Fund. That decision by the county will force the state to “backfill” the money to K-12 schools that the county ought to be paying, but it leaves the state’s community colleges $12 million to $15 million short, the state says.

“We’re certainly disappointed that the state is resorting to a lawsuit,” said John Moorlach, chairman of the county’s Board of Supervisors, adding that “we certainly tried to work with everybody.”

The foundations of this dispute can be traced to the county’s 1994 bankruptcy. Afterward, the county needed a way to assure investors that it could make interest and principal payments on bonds it wanted to sell. The solution was a dedicated stream of revenue from VLF funds, allocated by the state to the county to back the bonds.

The allocation was continued in 2003, when the state moved to reimburse counties and cities for revenue they lost when the VLF was cut from 2 percent of a vehicle’s value to 0.65 percent. The following year, the county refinanced some of its bond debt and found that its creditworthiness had improved such that the dedicated VLF revenue stream was no longer needed to sell the deal to investors, said H.D. Palmer, spokesman for the Department of Finance.

Yet since 2004, Orange County has continued to receive “that extra increment of VLF revenue that 57 other counties have not, up until last year,” Palmer said.

Last June, SB 89 was enacted, cutting off the extra VLF revenue that had been given annually to Orange County. That put the county in a bind — it was counting on the money to balance its own budget.

Within days of voting for SB 89, Assemblyman Jose Solorio (D-Santa Ana) introduced AB 43 to try to recoup the money for the county, but his bill never came to a vote in the Senate.

Then in November, the county announced that it would keep an extra $73.5 million of property tax money that would have gone to the state to pay for schools. The rationale? The county had been receiving a proportionally smaller disbursement from the Education Revenue Augmentation Fund than other counties to balance out the higher VLF allocation it had been getting.

When county bean-counters crunched the numbers on what they said the county should get from the education fund in the absence of a higher VLF allocation, they came up with $73.5 million, which the Board of Supervisors decided to keep. That move avoided layoffs of county employees while provoking whoops of protest from local school officials.

The county released a statement Thursday saying it “is only seeking to be treated the same as all other counties on the issue of property tax allocation” and that it “has loaned over $25 million to local schools to mitigate the financial impact of the state’s decision to reallocate the county’s Vehicle License Fee revenue.”

Moorlach said the county supervisors will consider how to respond to the state’s lawsuit at their April 17 board meeting.

 

Editorial: Cool toward idea of ARTIC in Anaheim

$180 million train-bus depot seems unjustified by city’s level of ridership.

The Register’s Editorial Board wonders why the Orange County Transportation Authority is pushing for a new, grandoise train station and bus depot in Anaheim, at an estimated cost of $180 million.

The OCTA, the county’s multibillion-dollar transportation agency, and Anaheim are pressing ahead to break ground on the Anaheim Regional Transportation Intermodal Center, planned as a 66,000-square-foot train complex that County Supervisor Shawn Nelson described to us as a “glass palace,” based on an architectural rendering of the proposed structure.

OCTA is attempting to fund ARTIC in part with dollars mostly from the taxpayer-approved Measure M2 local half-cent sales-tax surcharge for transportation projects.

Mr. Nelson and Supervisor John Moorlach pointed out to us that the OCTA wants this new development located in Anaheim even though Fullerton and Irvine both have more passenger traffic at their respective stations, which are served by both Metrolink and Amtrak. Irvine, in fact, has more than double the traffic of Anaheim’s station, according to OCTA data. Irvine sees an annual ridership of 1,063,538 passengers; Fullerton, 869,076; and Anaheim, 527, 541.

Editorial Board visitors to the Irvine and Fullerton stations noted their relatively modest sizes, yet both stations seem to get the job of loading and unloading passengers done just fine. Why would Anaheim need facilities much larger when its current ridership levels do not warrant such a substantial investment of taxpayer funds? Mr. Nelson articulated a similar concern in a telephone interview. “Whether or not Anaheim needs a new station, and I believe they do not,” he said, “the ridership in Anaheim does not support a new train station, let alone a 66,000-square-foot glass palace.”

There is another rub. Mr. Nelson told us that some of the funds OCTA is trying to allocate for ARTIC are ineligible because Measure M2 mandates they be spent on “improvements necessary for the connection to high-speed rail.”

There are two obvious red flags here. First, ARTIC is a brand-new structure, not a renovation, though OCTA claims that portions of existing platforms and tracks will be used.

Also, while California High-Speed Rail’s original plan included a terminal in Anaheim, the first phase of the latest version does not reach Orange County.

Supporters likely would argue that Anaheim has 20 million tourists a year, and that this depot is important for infrastructure development.

We see the point, but infrastructure development for its own sake does little to ease our concern and likely the concern of many taxpayers that this massive expense of resources might be better stewarded.

As for Anaheim’s substantial contribution to tourism, that is little justification for using public transportation dollars to aid the tourism industry.

In fact, 20 million tourists are visiting Anaheim by using other forms of transportation, like cars. And if private industry sees the value of adding new mass transit to the city, the dollars should come from that sector.

We will continue to follow the situation, but, at this juncture, the ARTIC seems to have potential to become Orange County’s own big-money rail boondoggle.

$180 million train-bus depot seems unjustified by city’s level of ridership.

 

 FIVE-YEAR LOOK BACKS

1997

April 3

Teri Sforza of the OC Register provided a bankruptcy criminal case update in “Raabe’s assurances replayed – COURTS:  Testimony includes a tape of a 1994 conversation in which investors were told all was well.”  For those interested in the bankruptcy era, Matt Raabe’s recorded comments were made on the day that I provided then Chairman of the Board Tom Riley an 8-page, detailed analysis of the Orange County Investment Pool, which clearly stated that all was not well.  When it came to the prediction of the possible implosion of the investment pool, after all of the public ridicule I incurred at the time, I was vindicated within six months of the election.  For the next implosion, public employee defined benefit pension plans, of which I’ve been predicting for the last ten years, the public ridicule doesn’t seem to bother me as much.  What surprises me is those who defend them and the recent adoption of massive retroactive benefit increases, as if they were displaying another iteration of Matt Raabe’s arrogance, “we’re pretty sure we know . . . “

Matthew Raabe bent over a transcript of his own words Wednesday, listening to his voice rise above the hiss and drone of a bad tape recording, saying words time would prove altogether wrong.

            “We’re leveraged to the degree we believe is appropriate,” the county’s former assistant treasurer told the Orange County Water District’s investment committee May 31, 1994.  “We’re pretty sure we know how to run the pool at this size.”

            Raabe smiled wanly at the jokes he made and the laughs he got almost three years ago as he tried to reassure the water district that its $118 million was safe in the Orange County Investment Pool.

The Orange County Superior Court jury in Raabe’s trial on charges of fraud and misappropriation of public funds listened closely.  Raabe also is charged with lying to investors with reports like the one recorded, though he says he only repeated what experts told him and what he believed to be true at the time.

            The tape was made one week before the election for Orange County treasurer, when a spotlight was shone on Treasurer Robert Citron’s investment strategy by challenger John Moorlach.

“The type of pool that we operate is the kind of pool we’ve been operating for the last 15 years,” Raabe said on the tape.  “Bob Citron’s been running the pool for over 20 years.  And for the last 15 years he’s been using reverse repurchase agreements . . . . That’s been a successful program for us.  It continues to be successful.”

When Raabe addressed the water district again on Oct. 31, 1994, his comments seemed prescient.

“This year is not going to be one of our very best years,” he said.

In December, the pool collapsed and the county filed for bankruptcy.

The prosecution is expected to rest its case today.

April 4

Arleen Jacobius of The Bond Buyer provided a lengthy “issuer Profile” piece of the County’s Executive Officer in “Reconciling Market, Orange County Tests Chief Executive’s Political Skills.”  For fun, I’ll provide the opening four and the three closing paragraphs (it spares you the El Toro Marine Corp Air Station fun also provided in the piece).

Members of her staff have had their cars scratched with keys and faced audiences that resembled lynch mobs.  But Orange County’s Janice Mittermeier and her aides know that’s just part of the job.

            When she became county executive in September 1995, Mittermeier knew what she was getting into.  Her mission was to lead a bond market pariah back from the largest municipal bankruptcy in U.S. history.

            “Many times I got discouraged during the process, but we had to get out – ultimately, we had to make this work,” Mittermeier said in a recent interview.  “I never thought of quitting until it was finished.”

            The job took 18 months and the issuance of more than $1.7 billion of debt.  Now the county has to pay off all that debt while maintaining at least a semblance of services.

Orange County Treasurer John Moorlach said he feels comfortable with Mittermeier because, as fellow accountants, they speak the same language.  He said he is also grateful to her for supporting his push to transfer control of the county’s investment pools from Salomon Brothers Inc. back to his department.  The transfer of power was completed in January, and last month Fitch Investors Service gave the investment pool a AAA rating.

But Moorlach said Mittermeier’s commanding management style has its flip side.

“She is someone who makes up her own mind and then is closed to other suggestions,” Moorlach said.  “But I feel I’m allowed to exercise my own judgment and run my department.  I’ve never seen her frustrated with pressure.”

2002

April 5

Dennis Foley of the OC Register provided a recapture case update in “Judge’s removal sought in tax case.”  Those traveling in legal circles made it very clear to me that no one ever wanted a case tried before Judge John M. Watson.  He was that bad.

Treasurer-Tax Collector John Moorlach has asked that Superior Court Judge John M. Watson be removed from the case.

Watson last year declared unconstitutional the method the Orange County assessor uses to “recapture” property values.  Moorlach later was added to the case, which at present affects one Seal Beach homeowner, because Moorlach would be involved in refunds if the ruling were applied to other taxpayers.

Under civil procedures, any party can make one pre-emptory challenge to force reassignment of a case.  While not required to state a reason, Moorlach issued a statement saying he believed Watson was “prejudiced against the treasurer.”

2007

April 6

Tony Saavedra and Rachanee Srisavasdi of the OC Register provided a John Derek Chamberlain update in “Inmate death probed – Supervisors want D.A.’s office to investigate killing of a man while deputy watched baseball on television.”  I’m providing the entire article as the closing paragraphs are important.  When I became a Supervisor there were more than 30 lawsuits in process against the County’s jails and other Sheriff-related matters.  Five years later, we are still dealing with a few of them.  It would be helpful if the reporters covering the resolution of these cases would include one fact:  Whether the case was pre- or post- Sheriff Hutchens.

Orange County lawmakers are questioning the credibility of a sheriff’s investigation into the death of a jail inmate beaten while a deputy watched a Los Angeles Dodgers playoff game on television.

Chris Norby, chairman of the Board of Supervisors, said the sheriff’s department should have followed county policy and allowed the District Attorney’s Office to conduct the investigation.

"It’s to everybody’s advantage for the district attorney to do it, so the investigation is as credible as possible," Norby said.

Sheriff’s officials in past interviews said the vaguely worded county policy actually gives the sheriff’s department the ability to investigate jail homicides if it chooses.

At least three county supervisors launched their own probes after a March 29 report in The Orange County Register that Deputy Kevin Taylor admitted watching television during the estimated 20-minute melee that killed John Derek Chamberlain. Six inmates have been charged in the Oct. 5 homicide, including one who alleged that Taylor instigated the attack with help from Deputy Jason Chapluk, according to investigation records.

County Supervisor John Moorlach said the television was gone when staff members from his office, as well as the office of board chairman Norby, toured the guard station at Theo Lacy facility in Orange last week.

"We viewed it as a form of spoliation (altering) of evidence," Moorlach said. "It made it difficult to confirm what he was watching. What was the angle? Why was a baseball game so captivating?"

A spokesman for the sheriff’s department said deputies removed the television while cleaning the guard station the night before Friday’s tour and neglected to return it.

"I know it was a surprise even to the captain and the chief who were there," said spokesman Ryan Burris. He said the television was returned, in time for a fact-finding tour Monday by staff members from the office of Supervisor Pat Bates.

Chamberlain, 41, was arrested on misdemeanor charges of possessing child pornography. Hours before his death, his attorney had asked that deputies consider moving Chamberlain to another location for fear of his safety. Taylor and Chapluk told investigators that they offered that day to move Chamberlain, but he declined. Rumors soon spread that Chamberlain was in custody for molesting a child. Defendant Jared Petrovich, who allegedly orchestrated the beating, told sheriff’s investigators that Taylor called him out of the barracks and then talked with Chapluk, loud enough to overhear, about Chamberlain being a child molester.

Chamberlain’s father, George, has filed a $20 million dollar liability claim against the county, alleging that deputies instigated the attack on his son.

Supervisors are expected to consider the claim in a closed-door session April 17.

Frank Mickadeit, columnist for the OC Register, provided a Treasurer update in “13 years later, one investor still antsy.”  Early in my role as Treasurer, I attempted to get the County on the accrual basis of accounting for reporting interest earnings to pool participants.  Former Auditor-Controller David Sundstrom would have nothing of it.  If there was a cash account with a negative balance, he would not stand for it (even though there was a receivable to back it up).  Consequently, the Treasurer’s office would have to report when the accrued interest earnings had actually been received and then post it to the accounts of the participants.  Here’s an example, the Treasurer purchases a one year bond that pays interest of $12,000, but only makes payments once every six months.  The investor earns $1,000 per month.  Debit investor’s cash account, credit County’s.  For five months, the County’s account has a deficit balance.  In the sixth month, the account is zero.  The deficit balance is secured by the upcoming interest payment.  But, simple minds do things simply.  Argh.  So, if you’re a participant and not paying attention to this silly nuance, you may just end up in a Frank Mickadeit column.

The county Treasurer’s Office out of cash? Chriss Street had been in office less than two months when the rumor started: The Treasurer’s Office had failed to make an interest payment to investment-pool participants. Given the 1994 county bankruptcy and the skittishness that still lingers over the way investment partners were kept out of the loop during the Bob Citron era, this naturally had some people worried.

I’ll spoil this now and tell you that everybody I’ve talked to says the county’s $3.1 billion investment fund is very safe. But the county did, briefly, miss a $13 million interest payment to more than 200 public agencies, and one of those agencies, the Orange County Water District has pulled its money out of the fund. The incident has also created some political tension between the Treasurer’s Office and the Water District, with Treasurer spokesman Brett Barbre taking water board member Denis Bilodeau to task for "stirring the pot," and Bilodeau, retorting, "Brett might call me a pot-stirrer; I call it being a taxpayer advocate." Boys, boys.

The deal. After the bankruptcy, local public agencies such as cities and water and school districts once again started to pool their money with the Treasurer’s Office. Under John Moorlach, and now Street, it operates almost like a brokerage house, moving money around all day. The treasurer credits interest to each investor’s account monthly. Because it is a public agency, however, it is only allowed to tell investors each month how much they accrued; it can’t actually put that money into their accounts until they collect it from the places they invested it. There is often a lag of several months. The Treasurer’s Office told investors that last November they made a collective $13.4 million and forecast it would be placed in their accounts Jan. 29.

But when water district CFO Sharon Koike got her agency’s January statement from the Treasurer’s Office, she noticed the interest payment wasn’t credited. Her agency was due about $19,000. Koike called the Treasurer’s Office and was told there had not been enough cash on hand to make the payment. Alarmed, she followed up with emails to her bosses and questions to higher-ups at the Treasurer’s Office. Word started getting out, and Barbre said he got a call the next day from a private broker saying he’d heard the county was "out of cash." In "an abundance of caution," OCWD assistant general manager John C. Kennedy told me the district pulled most of its $4.4 million out of the pool. In hind sight, he acknowledged, OCWD "maybe overacted." But if nothing else, it tells you just how badly Citron damaged the county’s reputation that even 13 years and two treasurers later, one public agency jumped out at the slightest whiff of trouble. (Koike was on vacation this week and not available for comment.)

So what did happen to the missed $13.4 million? Well, the money for such payments gathers in its own account over several months, as money is released to the Treasurer’s Office from various investment funds. The "forecast" that the account would reach the $13.4 million level on Jan. 29 was simply off by a few days, which "happens from time to time," according to Assistant Treasurer Paul Gorman. At that point, only $10.4 million had been wired into it. But by Feb. 5, the full $13.4 million was there, and it was credited to the investors. Even the interest on the interest was paid. In fact, by the time Koike called, the money was already in her account.

Was this much ado about nothing? Well, some water board members say they are shocked that out of all the money managers who have investments in the pool – remember, 250-300 entities – only one caught the problem on the monthly financial statement and called the Treasurer’s Office. Did they not learn a key lesson of the bankruptcy? And why wasn’t the Treasurer’s Office proactive? "The problem was," Bilodeau says, "the Treasurer’s Office didn’t commun

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